The statement that a portfolio is immunised using duration matching:
A)means that the FI is entirely hedged against interest rate risks
B)is misleading as duration matching is a dynamic process and only hedges the FI against instantaneous interest rate changes
C)is misleading as duration matching is a dynamic process and only hedges the FI against interest rate changes that occur within a month
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

Duration matching is a dynamic process that seeks to protect against interest rate risk by matching the duration of assets and liabilities. However, it only protects against instantaneous interest rate changes and not changes that occur over a longer period. Therefore, it is not accurate to say that a portfolio is completely immunized against interest rate risk.

The Statement That a Portfolio Is Immunised Using Duration Matching